Since the Russia-Ukraine conflict on 24th February, followed by the invisible economic world war, wheat prices have increased by 34% (1), oil prices have increased by 40% (2), and nickel prices have increased by 221% (3).
As both the United States and the European Union declared plans to restrict or outright prohibit Russian oil, these price increases show no signs of abating.
Last week, EU officials outlined a plan to achieve independence from Moscow for their energy by 2030. It would start by limiting natural gas demand at least two-thirds from Russia this year.
“We must become independent from Russian energy sources, including oil, gas, and coal. We cannot rely on a supplier who threatens us,” said Ursula von der Leyen, President of the European Commission (4), in a statement.
Notably, The EU depends on Russia for over 40% of its natural gas, 27% of its oil, and 46% of its coal imports. Together, the trade is worth more than tens of billions of dollars a year to Russia, led by Vladimir Putin (5).
Meanwhile, the Biden administration in the US announced an outright ban on all Russian coal, natural gas, and oil imports. The United Kingdom government also announced that it would phase out oil imports from Russia by the end of 2022 and look for new ways to end natural gas imports.
These extraordinary economic turbulences indicate an unseen economic world war that has already begun and will continue to drive a tumultuous decade.
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Financial Conflict and Economic World War
The western world believes that an all-out economic conflict against Russia is the best way to stop its aggression against Ukraine. And they continue to wage more economic warfare to undermine Russia’s capacity to continue the charge.
According to a report by The Guardian (6), western countries are looking to deplete the state income of Russia by limiting its trade.
“By reducing Russian trade with the West, we can diminish the Russian state’s income. Every day, the United States, the United Kingdom, and the European Union acquire more than 700 million USD worth of oil, gas, and other resources from Russia. Sanctions have not been imposed on some of Russia’s major state-owned firms, crucial for commodity trading. Europe’s economies, particularly Germany and Italy, should indeed begin planning for living without Russian gas as soon as possible, or face a full-fledged embargo,” said the report.
The report further called for blanket sanctions against all Russian and Belarusian banks, blocking their assets and making it illegal for anyone to do business with them. In addition, the report also suggested identifying and seizing cryptocurrency wallets linked to Russia.
It is also worth noting that at the beginning of Russia’s aggression against Ukraine, the UK, US, and EU froze a large part of the Russian central bank’s 638 billlion+ USD. About 403 billion+ USD of the bank’s foreign exchange reserve was held in euros, dollars, pounds, and other foreign (western) currencies (7). Meaning Russia can’t access these funds now.
These measures significantly impacted the Russian economy, and we can only expect it to increase over time. Even the value of Russian companies listed on the London Stock Exchange decreased by 98%, and most of them have lost as much as 40% of their values (8, 9).
There has also been a significant impact on the Russian private sector, in which western companies are treating the nation as a toxic market. Several tech, energy, manufacturing, and consumer goods companies are pulling out their businesses from Russia (10).
A global campaign is going on to boycott Russian goods, pressuring all companies to stop cooperating with Russia (11). For instance, Norway’s sovereign wealth fund has already declared its 3 billion USD investments in Russia worthless (12). We can expect such moves to intensify further on all private and pension funds holding Russian assets.
Overall, the past two weeks were a coordinated assault on the Russian economy. However, several western nations have avoided an immediate ban on Russian gas imports because of their importance to the EU.
Amid all these, fears also emerged that Russia could hold Europe hostage over its energy exports (14). However, it was soon calmed down with reports suggesting that Russia won’t cut off gas to the western countries since it is now the sole pillar to support its already tumbling economy.
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Europe’s Shift to Renewables and Other Measures
According to Dr. Emma Aisbett, a fellow at the Australian National University, Europe is still economically vulnerable to Russia because of its energy dependence on imports. Adding that, the reliance had only increased in recent years as most European countries shut off their coal-fired power plants to reduce their carbon emissions (15).
“They are already facing record gas prices worldwide, and the recent developments are only going to make it worse,” said Aisbett. “For example, Germany already has the most expensive electricity globally. Add very high gas prices to that, and there will be real challenges of energy poverty, particularly in colder climates.”
On the other hand, Saul Kavonic, an energy analyst from Credit Suisse (16), says that the price pain for Europe would depend on the events happening in Ukraine. He believes that in a “benign” case, the gas would keep flowing into Europe even if there is a disruption in supplies through Ukraine.
He also believes that Europe would manage any situation using stored fas and purchasing liquified nature gas from other overseas suppliers like the US and Qatar.
Meanwhile, James Bowen, a Perth USAsia Center policy fellow (17), questioned the extent to which the EU could turn to the United States to provide gas exports, saying that the US doesn’t have the magnitude to replace Russian supplies and it would be more expensive in any case.
In short, if, in a worst-case scenario, Russia severed its gas supplies to Europe, it would have catastrophic consequences for businesses and households across Europe (18).
However, since Europe is reaching the end of the winter heating period, it has got a bit of time if it does happen.
“Europe has been moving away from Russia for its gas for a long time, and the recent developments can further push Europe to wean itself off Russian energy sources.”
Likewise, Dr. Aisbett also said that it would take years for Europe to gain its energy independence, but now the time frame has likely become a lot shorter because of the Russia-Ukraine conflict.
Notably, the European Union had also connected its energy grid to Ukraine’s in February to reduce its reliance on Russia (19).
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The Overall Impact of This Economic World War
This economic world war is driven by climate change, inflation, and nationalistic trade policies, which threaten the global order (20).
As gas prices continue to surge, we can also expect food prices and prices of major commodities to go up with it. All developing economies in the Middle East, Central Asia, Africa, and India need to secure their economies.
This conflict had aggravated the global economy when we had only started to see the recovery from the pandemic-induced contractions. Now, there are market uncertainties in ways that would reverberate worldwide.
Like the novel coronavirus in 2020, the latest crisis has come unexpectedly, and much will depend on what will happen next (21).
However, it is already clear that this economic world war will immediately lead to higher energy and food prices and supply shortages, especially for low and middle-income economies. And we expect the effects to ripple far beyond.
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Oil and Food
For food, certain developing economies rely largely on Russia and Ukraine. More than 7% of the wheat imported by many economies in Europe, Central Asia, the Middle East, and Africa comes from these two nations.
A disruption in the production or transit of crops and seeds from Russia and Ukraine would damage these economies. Lower-income countries may face greater famine and food shortages due to disruptions in supplies and higher pricing.
Also, Russia is a major player in the energy and metals markets: It controls a quarter of the natural gas market, 18% of the coal market, 14% of the platinum market, and 11% of the crude oil market. Infrastructure, petrochemicals, and transport would all be hampered by a sharp decline in the supply of these products. It would also stifle overall economic growth.
According to estimates in a forthcoming World Bank report, a ten percent increase in oil prices that lasts several years can reduce growth in commodity-importing developing nations by a tenth of a percentage point. Oil prices have increased by over 100% in the last six months. If this continues, the oil may lose a whole percentage growth point from importers like Turkey, South Africa, Indonesia, and China.
Turbulence in the Financial Market
Financial markets have already been shaken by the conflict, causing a sell-off in equities and bonds on the world’s major exchanges.
High investor risk aversion could result in capital outflows from emerging economies, causing currency devaluation, stock market declines, and greater risk premiums in financial markets. It would be extremely stressful for the dozens of emerging economies with high debt levels.
Direct stimulation, on the other hand, may worsen inflation. All of this suggests that financial turbulence as a result of increasing commodity prices, as well as energy and food market volatility, will affect us this decade.